After 2020, all EU members will have to adopt the euro

Political union in the eurozone is an economic existential necessity, not a
re-negotiable ambition

When British politicians propose that EU political integration should slow, that is not merely seen as unattractive — it is impossiblePhoto: Reuters

By Andrew Lilico

5:00PM BST 01 Jul 2014

Recent events have made the British political commentariat more aware than before of just how committed European political leaders are to delivering political union in a Single European State.

It should now be clear that this is not the unlikely ambition of a few starry-eyed visionaries. It is the stated official goal of the Italian Prime Minister, the French President, the German Chancellor, the current and next Presidents of the European Commission, the President of the European Council, and just about every significant mainstream political figure in the Eurozone.

It is also, according to a Eurobarometer opinion poll in 2013, the desire of 60pc of Eurozone citizens.

What may still be less clear to some in the UK is that in the Eurozone this is not seen only as a culturally and politically desirable objective. It is also regarded as an existential necessity, a sine qua non for economic prosperity, and the answer to Euroscepticism of the sort seen in the 2014 European Parliament elections. So when British politicians propose that EU political integration should slow or that the EU should prioritize some other objective (e.g. the Single Market), that is not merely seen as unattractive — it is impossible.

The reasons why are economic. As was widely discussed in the UK debate about the euro in the 1990s and early 2000s, to make a single currency such as the euro work, one needs an adequate combination of trade integration, similarity of economic cycles (so that one size fits all interest rate and exchange rate policies do indeed fit all), capital and labour mobility (to offset any “asymmetries” in economic shocks – that is, economic shocks hitting some parts of the Eurozone harder than others) and fiscal transfers (to compensate for any large or long-term differential performance that is not offset by capital and labour mobility).

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The Eurozone has fairly good trade integration, some material differences in economic cycles (though not especially larger than the differences between regions within the UK or US), and fairly high capital mobility. But even when they occur at around the same time (so cycles are not out), economic shocks affect some parts of the Eurozone much worse than others (as we have seen in the Eurozone crisis). And, Ireland excepted, labour mobility is not particularly high (despite all the complaints about immigration in some Member States).

That means – as has been argued all along – that for the Eurozone to work over the longer term there will need to be much more significant fiscal transfers between regions.

The EU has a modest system of fiscal transfers (the “structural and cohesion funds”) but these are only of order €60 billion across the whole EU, much of which currently goes to non-Eurozone Member States.

A country like the UK has internal fiscal transfers between regions (e.g. London to Liverpool) of some 3 per cent of GDP (more on some definitions). For the Eurozone, with its €9.6 trillion GDP, that would imply nearly €300 billion of fiscal transfers — several times the current amount.

One option to make the Eurozone work without adding significantly to budgets would be for Member States to cease their own internal regional transfers, with funds instead going to create a system of centralized fiscal transfers, with a Eurozone treasury distributing funds. That may be more than is required, however. It could perhaps be adequate only to have around €100 billion extra distributed directly from the Eurozone.

But even at only €100 billion, the Eurozone would still need an income stream to fund such transfers. The Financial Transactions Tax was intended to provide an initial funding stream for the Eurozone, but some other tax will in due course be identified. The key will be that such taxes will be imposed and levied directly by Eurozone tax authorities – not received as “contributions” from Member State treasuries. With its own tax stream, the Eurozone will also be able to raise debt, and that debt can straightforwardly be backed by the European Central Bank (in a way that individual Eurozone Member State debt cannot).

As a body that raises taxes and debts and distributes hundreds of billions in funds, the Eurozone treasury will need to be politically accountable to those that pay it taxes. That will mean pan-Eurozone elections of politicians to oversee Eurozone tax-and-spend decisions. Greater tax- and debt-raising powers at Eurozone level will inevitably entail some limitations upon spending and debt-raising at Member State level.

Furthermore, increased capital mobility also means greater financial linkages between banks. So if a bank becomes distressed in one Member State that has increasing implications for other Member States and for the functioning of the Eurozone payments system.

In the Eurozone, the lack of such mechanisms of fiscal transfers, banking system oversight, constraints upon Member State spending and debt-raising decisions, and the associated much deeper political union are seen as a key cause of the Eurozone crisis.

The Eurozone crisis, in turn, is seen as creating economic hardship and anxiety that has fostered Euroscepticism and in some cases racism and other forms of political extremism.

If adequate economic mechanisms and political union are not introduced, it is believed that the Eurozone crisis will return and anti-European sentiment will (rightly) increase, ultimately destroying the Eurozone and the EU project as a whole. Banking union and constraints upon Member State budgets have been introduced. Even more political integration is on the way.

So in the Eurozone, the answer to increased Euroscepticism is not seen as any form of rowing back on integration. Quite the opposite — Euroscepticism has arisen because political integration had not proceeded rapidly enough.

For the Eurozone and EU to survive at all, deeper political integration, including Eurozone-level tax and spending decisions and democratic mechanisms to oversee them plus reduced control over tax and spending decisions for Member State, are an existential necessity.

The only remaining question is whether this Single European State, formed from the Eurozone, will be something distinct from and alongside the European Union, or simply identical to or part of the European Union.

When the euro was first agreed, the UK and Denmark “opted out”. But at that stage that only meant they were not joining at the start. There was never intended to be any long-term form of EU membership that did not include euro membership. The UK did not say “never” to begin with, and all new EU members since the euro began in 1999 have had to commit to joining. Indeed, by 2020, all but five member states of the EU are due to be euro members and Poland is likely to join by then as well, leaving just the UK, Denmark, Sweden and Bulgaria outside.

That means that at some point, perhaps shortly after 2020, with the Eurozone constituted as a confederate Single European State and wanting to use the institution of the EU as its institutions — the European Parliament as its confederation-level Parliament, the Commission as its civil service and so on — the residual nugatory non-Eurozone EU will have to be wound up.

The most likely course is for it to be fused together with the non-EU members of what is called the “European Economic Area” (Norway, Iceland and Liechtenstein). The Single European State will set the rules for the Single Market, and the other members of the European Economic Area will be welcome to trade with each other and with the Single European State provided they abide by those rules.

This all means current debates about whether the UK will have a referendum and how folk will vote is of only passing significance. What counts fundamentally to whether the UK stays in the EU after about 2020 is whether there are any non-euro members of the EU at all, given the existential economic necessity of the Eurozone forming into a deeper political union. At present that seems highly unlikely.